The choice ,is the novel on international trade and trade policy, was published in 1994 and it was selected as one of the best books of 1994 by the Financial Times and one of the top ten books of the same year by Business Week. In the book, David Ricardo tries to persuade Ed Johnson to understand the free trade is better for states and nations. He explains many and many times better side of free trade , he gives lots of various examples for makes it more comprehensible. The book includes dialogues that, Ed’s questions and David’s explanatory answers to him make the story very funny and easy to read. It is so smooth story.
In the book, David Ricardo returns the life 137 years after his death by taking a one day permission from the other world to discuss international trade theory and policy with Ed Johnson who is an American television manufacturer “Stellar Television Company” , who want to protect his company from Japanese televisions and they also have some time travels to compare the year 1960 and 2000. First of all, Ed Johnson who was happy with his employees and profits well before Japanese came into the US market. He wants to protect his company and workers so he wants restrictions on Japanese imports from one of his friend, who is the congressman, Frank Bates ,telling that he is harmed from the challenge of foreign competition. Firstly, the congressman don’t agree with Ed and add that “competition is the American way of life”. However, Ed persuades him for limitation telling him that it will really help to congressman to keep workers safe in the presidency campaign while the election is coming soon. But then Frank started to adopt the idea of protectionism and he want to apply this idea in all trade issues. And he wants from Ed to make one of his persuasive speeches in the party congress. It is not seem difficult. He will mention the grandeur of US or the importance of the protection of US industry from foreign competition. It is true that Ed wants restrictions on Japanese television imports but he was confused about overall restriction of imports.
Afterwards Ricardo comes and takes him to 2000s America where country benefits from the free trade with strangers. They see that in these economic conditions television manufacturers in USA produce with lower labor and raw material costs than Ed’s most efficient years. This is the favor of roundabout way. In this part Ricardo explains his comparative advantage theory. Direct way of producing is combining raw material, workers, factory and produce. With roundabout way of producing A, B with a lower comparative cost is produced but after an import and export process what is in your hand is A. He gives the example of exchange of American drugs and Japanese televisions. As the sources of a country - raw materials, people, number of hours etc.- is limited they must be used in most appreciate way by specializing a few things rather than trying to do everything. In the example Japanese produce televisions more efficiently and Americans produce drugs then, if both sides produce what they are specialized, the both sides become the winner with more products and by using less resources. It is a positive sum game. Ricardo explains him overall economic development, he shows the chain of increase in wages, inflation and wealth. When they look at the increase inflation the rise in the wages is not impressive but the compensation ratio is incredible. However, it is not easy to persuade Ed that both sides can be winner, if Japanese wins gains than he feels as an American loosing. Trying to deny Japanese are better than Americans in television producing he asks the possibility of Japanese government’s subsidy. He is suspicious about that if Japanese government absorbs the short-run losses of television manufacturers in their country to give harm to American market for future hopes. Ricardo responds to this “dumping is unlikely to be a profitable strategy”. Competition among firms from different keeps prices low but in the end it all countries in the competition are made better off. As if Ed suspected, Japanese keeps out the American products then she will reject the benefits of specialization and roundabout way and this will make them poorer. He is also suspicious about the Japanese estate owners in USA and Ricardo explains even though Japanese ownership profits from there, that money had already g to the first American who sold the estate and it also returns to Americans by taxes and new investments.
In a liberal world that a countries has a limited capacity to produce something. Ricardo tells us that you have two different ways of production. First one is direct production which is that by combining raw materials, people and capital. Second one is indirect production that by producing i.e. medicine that you produce it in e very efficient way and selling that for importing TV. One country can’t produce all things in a very efficient way. So that in order to do that free trade and using comparative advantage for specific products
Criticisms of Free Trade and Protectionism
By Robert Russel
(2)“To hear most politicians talk, you’d think that exports are the key to a country’s prosperity and that imports are a threat to its way of life. Trade deficits—importing more than we export—are portrayed as the road to ruin… Politicians are always talking about the necessity of other countries’ opening their markets to American products. They never mention the virtues of opening U.S. markets to foreign products.
This perspective on imports and exports is called mercantilism. It goes back to the 14th century and has about as much intellectual rigor as alchemy, another landmark of the pre-Enlightenment era.
The logic of “exports, good—imports, bad” seems straightforward at first—after all, when a factory closes because of foreign competition, there seem to be fewer jobs than there otherwise would be. Don’t imports cause factories to close? Don’t exports build factories?
But is the logic really so clear? As a thought experiment, take what would seem to be the ideal situation for a mercantilist. Suppose we only export and import nothing. The ultimate trade surplus. So we work and use raw materials and effort and creativity to produce stuff for others without getting anything in return. There’s another name for that. It’s called slavery. How can a country get rich working for others?
Then there’s the mercantilist nightmare: We import from abroad, but foreigners buy nothing from us. What would the world be like if every morning you woke up and found a Japanese car in your driveway, Chinese clothing in your closet, and French wine in your cellar? All at no cost. Does that sound like heaven or hell? The only analogy I can think of is Santa Claus. How can a country get poor from free stuff? Or cheap stuff? How do imports hurt us?
We don’t export to create jobs. We export so we can have money to buy the stuff that’s hard for us to make—or at least hard for us to make as cheaply. We export because that’s the only way to get imports. If people would just give us stuff, then we wouldn’t have to export. But the world doesn’t work that way.
It’s the same in our daily lives. It’s great when people give us presents—a loaf of banana bread or a few tomatoes from the garden. But a new car would be better. Or even just a cheaper car. But the people who bring us cars and clothes and watches and shoes expect something in return. That’s OK. That’s the way the world works. But let’s not fool ourselves into thinking the goal of life is to turn away bargains from outside our house or outside our country because we’d rather make everything ourselves. Self-sufficiency is the road to poverty.
And imports don’t destroy jobs. They destroy jobs in certain industries. But because trade allows us to buy goods more cheaply than we otherwise could, resources are freed up to expand existing opportunities and to create new ones. That’s why we trade—to leverage the skills of others who can produce things more effectively than we can, freeing us to make things we otherwise wouldn’t be able to afford.”
By Jason Welker (3)
(2)“R Klemen. Here’s my question… how do you measure wealth? You seem to suggest that foreigners buying our products brings wealth into the country, and that Americans buying foreign products sends wealth out of the country. I’d respond to that by asking what good is foreigners spending money on our goods unless it gives us foreign money to spend on theirs? In other words, is wealth the amount of money we have (this was the mercantilist’s philosophy) or is it the number of goods and services we consume (this is the modern economist’s philosophy).
If we accept that greater access to lower priced goods makes a country better off, then the money that has left the US for foreign countries in exchange for their manufactured goods represents not a loss of American wealth, rather an increase in the country’s standard of living measured by its total consumption of goods and services, which in my mind sounds like an increase in wealth.
This is not to say that government budget deficits financed by the sale of treasury securities to Asian nations is a good thing for the economy. Such sustained levels of deficit spending leads to higher interest rates and an increasing burden on taxpayers to pay the interest to overseas holders of our debt. This, in fact, does represent a transfer of wealth from the US to foreigners. When US tax dollars are used to pay the interest on foreign debt, American households get nothing in return. No cheap imports, no new credit, no foreign direct investment in our capital stock or real estate markets, simply a transfer of wealth from tax payers to foreign creditors. Federal budget deficits need to be brought under control; unfortunately, in the current times of economic hardship, it is unlikely we’ll see any improvement in the national debt anytime soon. But it is not trade in goods and services that transfers wealth out of America, it is trade that makes us richer by allowing us to consume products of varieties and at prices we could never dream of without trade.
Regarding our trade deficits with several trading partners, you seem to quell your own concerns when you point out that the result of these deficits is increasing foreign ownership of US companies, securities, and foreign direct investment in real estate and capital formation. Again, unless we stand for some ideological principle of protectionism and self-sufficiency, I ask, what is the problem with foreign investment in the United States? In addition to being the largest recipient of foreign direct investment, the US also happens to be one of the leaders in investment in foreign assets as well. FDI goes both ways, and in both cases it leads to greater economic integration and wealth creation, not loss.
Economic integration and trade in goods and services as well as financial and real assets has made America richer, more prosperous and secure over the last 60 years than any tariff, quota, subsidy or other form of protectionism you can name. The interconnectedness of the US and the world economies, indeed trade itself, is probably the primary reason the US has not already slipped into another Great Depression in the wake of the credit/financial crisis already underway. I cannot help but be reminded of the great American motto uttered by the patriot Patrick Henry regarding the formation of the union of American states: “united we stand, divided we fall”. I’d suggest that today that our great country is more united with the rest of the world economically than it has ever been in history, and that this unity and interdependence has made us far more resilient and prosperous than we could ever have hoped to have been had we pursued a path of protectionism and self-sufficiency over the last century.”
By CHARLES SCHUMER AND PAUL CRAIG ROBERTS
Published: January 6, 2004
(4)“Most economists want to view these changes through the classic prism of ''free trade,'' and they label any challenge as protectionism. But these new developments call into question some of the key assumptions supporting the doctrine of free trade.
The case for free trade is based on the British economist David Ricardo's principle of ''comparative advantage'' -- the idea that each nation should specialize in what it does best and trade with others for other needs. If each country focused on its comparative advantage, productivity would be highest and every nation would share part of a bigger global economic pie.
However, when Ricardo said that free trade would produce shared gains for all nations, he assumed that the resources used to produce goods -- what he called the ''factors of production'' -- would not be easily moved over international borders. Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive: in today's case, to a relatively few countries with abundant cheap labor. In this situation, there are no longer shared gains -- some countries win and others lose.
When Ricardo proposed his theory in the early 1800's, major factors of production -- soil, climate, geography and even most workers -- could not be moved to other countries. But today's vital factors of production -- capital, technology and ideas -- can be moved around the world at the push of a button. They are as easy to export as cars.
This is a very different world than Ricardo envisioned. When American companies replace domestic employees with lower-cost foreign workers in order to sell more cheaply in home markets, it seems hard to argue that this is the way free trade is supposed to work. To call this a ''jobless recovery'' is inaccurate: lots of new jobs are being created, just not here in the United States.”
The Myth of Free-Trade Britain
John V.C. Nye*
(5)“Free trade should mean just that: free trade, with all goods admitted without duties, quotas, or restrictions. That was not British policy. They removed most tariffs but mostly on items in which they had a comparative advantage. In other words, they mostly removed tariffs on items for which Britain had little to fear in terms of competition or which were of trivial importance in overall trade.”
My thoughts:
Nowadays center of free trade is in crises that theories can’t be helped. I wonder that which advices should Ricardo tells us if he was alive. I think that if one country finds a way to produce more and more products in a different ways. In a free trade system what will other countries do? Maybe we should establish new efficient systems to adopt ourselves in global world. And in this book Ricardo can’t convince me to how can really get benefit in a real protectionist world from free trade. What if your country can’t adopt its domestic production to a certain level in the age of free trade. As I can say that in this kind of situations free trade turns us into slaves of MNE (multinational enterprise) by hegemony states. Free trade but how is and how much I think is the real question that must be answered nowadays.
References:
- http://www.econlib.org/library/Columns/y2003/Nyefreetrade.html